Edited version of private advice

Authorisation Number: 1052087777759

Date of advice: 27 February 2023

Ruling

Subject: Rental deductions - repairs and depreciating assets

Question

Are the costs incurred to repair your rental property kitchen deductible under section 25-10 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Based on the information provided to the Commissioner, the work carried out on the rental property kitchen cupboards damaged due to flood is a repair under Section 25-10 of the ITAA 1997.

Repairs are deductible where they are incurred during the time the property or properties are held for income producing purposes and the damage or defects occur during that time.

The property is used for income producing purposes and the work completed is not the replacement of an entirety, nor is it improvements. Therefore, the repair costs are deductible under section 25-10 of the ITAA 1997.

Question 2

Are the undeducted capital expenditures from previous capital works destroyed by flood deductible under section 43-40 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Based on the information provided to the Commissioner, you can deduct in the income year in which the capital works are destroyed, the amount of undeducted construction expenditure (called a balancing deduction) under section 43-40 of the ITAA 1997 provided that all conditions outlined in this provision are met.

You did not receive a payment from an insurance company for the destruction of previous capital works. The capital works were used for income producing purposes before they were destroyed, and you can claim a capital works deduction. Therefore, you are entitled to a deduction for the undeducted construction expenditure of the destroyed capital works under section 43-40 of the ITAA 1997.

Question 3

Are the written down value of depreciating assets destroyed by mould deductible under section 40-285 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Based on the information provided to the Commissioner, a balancing adjustment event occurred when some depreciating assets you held were destroyed by flood. You did not receive a payment from your insurer for the destroyed depreciating assets and your insurer did not carry out or incur costs to replace the depreciating assets.

As the termination value of the depreciating assets is less than their adjustable values you are entitled to a deduction for the difference under section 40-285 of the ITAA 1997.

This ruling applies for the following periods:

Year ended 30 June 20XX

Year ending 30 June 20XX

The scheme commenced on:

2 July 20XX

Relevant facts and circumstances

You have a rental property.

In XXX 20XX you renovated and installed a new kitchen.

The new kitchen consists of cupboards that are along the floor and some that are attached to the wall above.

This cost $XXX,000 and is being depreciated under division 43.

In XXX 20XX the property was affected by flood waters which inundated the house in up to a metre of water.

Everything below the height of the water has had to be removed and scrapped due to water damage, and has needed to be replaced/repaired.

This included the bottom kitchen cupboards that are along the floor.

The water damaged cupboards were replaced, but the benchtop, sink and above cupboards were all kept.

You replaced the bottom cupboards with identical ones from the recent renovation.

You did not have insurance on the rental property due to the high premiums.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 25-10

Income Tax Assessment Act 1997 Section 40-285

Income Tax Assessment Act 1997 Section 43-40